Trickle Down Or Trickle Up?
For quite some time now the world’s financial system has been fragile. The Federal Reserve Chairperson, Ben S. Bernanke is inundated with a dilemma in the wide ranged credit freeze surrounding today’s financial institutions. This problem goes far outside what interest rate cuts can mend in the economy.
The exceptionally low interest rates of the early and mid-2000s and the continual bailing out by Alan Greenspan of any Wall Street player that got into trouble created enormous temptations to speculate with borrowed funds and throw caution to the wind, completely ignoring risk. Why worry about risk when it’s not your money and even if you get into trouble you can get bailed out? This problem is called moral hazard.
Now there’s a problem. Those speculative derivatives do not have the value that the Wall Street salesmen claimed they had. There’s a desperate race to de-leverage at almost any price. Of course, buyers have grown scarce. No institutional investor wants to add more highly overvalued speculative package to his portfolio now that the true value of these packages is exposed in the light of day. We are in a liquidity crisis the magnitude of which we haven’t seen since before World War II.
Commercial as well as investment banks are sitting on overvalued assets such as mortgages and private equity loans they cannot sell due to being packaged with derivatives of very questionable value. This is a nice way of saying that Wall Street lied about the value and has overpriced them by billions of dollars. Basically this means that they do not have the cash to make new loans and this is killing our credit based economy. For banks and brokers to make their balance sheets stronger by de-leveraging the banks would need to reduce the number of loans on their books. Doing this would overwhelm the economy and turn a bad recession into a long lasting depression.
Hence the bailout by the Fed, in the form of longer-term financing at the discount window. What else can they do? Let the entire financial structure of the world completely freeze up? The Federal Reserve is lending cash to financial institutions while taking as collateral the subprime mortgages and related securities of highly questionable value that cannot be sold in the open market. The Federal Reserve is becoming the buyer of last resort. This is highly inflationary. The financial middlemen are supposed to take the cash borrowed from the Fed and lend it back out again, this time to higher-quality borrowers, but this is not happening. In theory, the way this would work would be a trickle-down effect.
So why don’t we give a trickle-up effect a try? The purposed bailout will cost at least $1,000,000,000,000. That is one trillion dollars for those having trouble! Instead of giving one trillion dollars of newly created money to the Wall Street players who are largely a part of our current problems, why not give that money to the people of America? This way it can then trickle-up to the Wall Street players by stimulating the economy. By giving about $3,200 to each person in America we may be able to get the cash flow back in the right track. This means a family of five would get $16,000 in cash to spend how they choose.
Why can’t we do this to help all of America in this way instead of a few Wall Street fat cats? Why is it they should be given a trillion dollars of new money to throw around like they have in the past?
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Tags: art, avi, book, Business, credit, expert, family, finance, form, Home, insurance, investment, Links, money, pr, sales, site, Source, uaw
